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Practice Valuation for Selling a Dental Practice

When people talk about the valuation of dental practices, there is a lot of jargon thrown around. As is generally the case, the jargon makes it sound harder than it is. Simply stated, dental practice valuation is a determination of the value of your practice. The valuation is important because of what it communicates to parties either interested in or involved in a dental practice transition. Before you can start selling a dental practice, you need an idea of what it’s worth.

The fact is, you want to get as much as you can out of your dental practice. You can set the price as high as you’d like, but, more realistically, you need to find that point at which you are getting the most for your practice within the range of what a buyer in willing to pay. Valuation methods are simply a means to get, as much as is possible, an “objective” value in order to begin negotiations with a buyer for the final sale price and terms.

To help you along, we’re going to answer a few questions about practice valuation. A little general knowledge can go a long way toward understanding what your accountant, business valuation consultant, and practice transition specialist will tell you about the value of your practice.

Why You Need a Dental Practice Valuation

People tend to overvalue their own assets. Not out of any kind of bad intent, but simply because our estimates are based on the value of the asset to us: what we paid for it, what we’ve put into it, what it means to us psychologically, the role the asset has played in our lives. All of these things affect how we see it. By having a third-party business valuation consultant assess and value your dental practice, you are starting with a value that has a greater degree of objectivity. Meaning that the value is one that outside parties can agree on, based on factors that matter more universally and less subjectively.

Having a more objective sense of the value of your dental practice can be useful for a number of reasons. It can give you a sense of what you can expect out of the deal. Meaning that you can project how much money you will walk away with and can determine whether your practice is really ready to sell. If the valuation comes in at or higher than what you expected, that’s great. If it comes in lower, you have the opportunity to consult with your advisors about investments to boost value before you put your dental office for sale.

When you are selling a dental practice, the outside valuation gives you an asking price. The buyer, however, also benefits from the valuation. The buyer is looking to balance a fair price with a strong investment. The valuation can either be simply accepted by the buyer as the baseline for negotiation. Or if the buyer wants to use their own business valuation consultant, the consultant will be verifying the accuracy of the valuation that is already done. In either instance, the valuation you provide is the starting point.

The methods for practice valuation is the same whether you have a general dentistry practice or a specialist practice. The difference, however, is in the risks associated with each of the different practice types— the number of patient cases, the stability of your referral base, etc. Because of this, you want to be sure your financial advisors and business valuation consultant has dental industry experience, so they know how to assess these factors.

How to Determine the Value of a Dental Practice

While the real work of valuation will be done by an accountant, it can be helpful to have an understanding of the methods and theories of dental practice valuation before you get too far down the road of selling a dental practice. Valuation relies on a combination of the following accounting methods:

  • Capitalization of earnings: this method takes the last three to five years of earnings, averages them, and divides that number by the capitalization rate. Earnings is typically defined as collections (not production but what you are actually paid) less overhead. This is basically the rate of return. It also identifies the risk to a buyer. The capitalization rate will be influenced by factors including A/R, patient flow, treatment planning, and staffing, so, again, you really need someone with a deep understanding of the dental industry and practice management in order to get a reliable number.
  • Discounted future cash flows: this method estimates your practice’s future cash flow, indicating to the buyer whether it’s really a good investment or not. The value is found by determining the annualized earnings (this is the actual income and expenditures of the practice for a particular period multiplied by the ratio of 12 to the number of months in the period; for example, if annualizing the income for the period January 1 through May 31, multiply the income for the period by 12 divided by 5, or 2.4), subtract the average individual tax rate, and then divide by the discount rate. Then, five years of future earnings are projected at a set growth rate (which is usually the baseline inflationary rate based on current trends) and averaged.
  • Comparable sales method: in a very basic sense, this method simply considers the sale of similar practices. This is similar to how residential homes are valued. With dental practices, this method considers a percentage of the revenue, perhaps a three-year weighted average, and multiplies it by 55-75%, depending on factors unique to the dental practice.
  • Summation of assets method: this method is simply determining the value of the tangible assets (equipment, furniture, building or lease, materials, etc.) and adding it to the intangible asset of goodwill.

A dental practice business valuator may take the numbers from each of these methods and combine them using a weighted system. How they are weighted will depend on an assessment of the actual practice and the informed opinion of the business valuation expert. Again, it is essential that your consultants have dental industry specific information or you risk the valuation being unreliable.

Note that what is not considered in any of these methods is past performance of your dental practice. A business valuation expert is not simply going to look at the history of your profit and loss statements and pick a number in line with those. They are more interested in performance trends overall, along with other factors not reflected on a balance sheet, such as the age of the practice and its assets, overhead percentage, and accounts receivable.

What Happens After Valuation?

When selling a dental practice, valuation is merely the starting point, not an end unto itself. The valuation gives the seller of a dental practice the information they need to set a listing price and begin marketing the practice. For the buyer, the valuation gives them the information they need to decide whether to pursue purchasing the practice at that price, to begin negotiations on price, or to look for another practice to purchase. Often, the value of a practice as determined by the business valuation expert is not the price it sells for. The terms of the deal, including seller carryback, contingent part of the sales price, and a split of price to determine long- and short-term capital gains, can influence the practice’s price.

How to Choose a Dental Practice Valuation Expert

Any accountant can look over your financial and tax records and stick a price tag on your practice. For that number to be reliable, however, you need a CPA who really understands the dental industry and all of the factors that make dental practices run. Specifically, you need a CPA with a specialization in dental practices. In addition to valuing the practice, a dental-specific CPA can offer additional assistance in areas such as structuring the transaction in the most advantageous format, obtaining financing, and minimizing tax exposure. If you are selling a dental practice and don’t already have an accountant with this level of expertise, ask your dental practice transition specialist for a referral.

Selling a Dental Practice? ddsmatch Southwest Can Help!

Here at ddsmatch Southwest, we bring the experience of successful dental practice to work for you. But don’t just take our word for it. Here is what one of our satisfied clients said:

“I would literally tell anyone, call those guys up. Follow exactly what they say to do, and just let them do it. There was zero effort on my part to do this.”


Mitch Conditt, DDS

As part of our process, we consult with you about your goals for your practice transition, the local dental practice transition market, establish the best transition options for you, and advise on improvement and investments that can boost your practices value. If you are considering transitioning your practice in the next five years, we’ll provide a free, no-obligation Practice Transition Assessment address each of those issues. Contact us today and find out what we can do for you.

What You Need to Know About Buying a Dental Office for Sale

A young doctor, on the cusp of their career, is full of hope for what lies ahead. But there can be apprehension as well. For many, ownership of one’s own practice is the goal. Many have done it, so it is certainly not out of reach. If you’ve not had experience with dental practice transitions, however, the process of buying a dental office for sale can seem difficult, complicated, and risky.

We’re not going to lie to you and say that is not complex. And there is certainly risk involved, as with most things in life. But with a little bit of information, and the right support team in your corner, it can be much simpler than it seems.

Here at ddsmatch Southwest, we are dental practice transition specialists. To help quell any fears, we’ll provide a short overview of why it can be a smart move to buy an existing dental practice rather than starting one from the ground up, and then we’ll give you some information that will help you get started. When you are ready to make your move, we have several dental offices for sale in Texas and New Mexico.

Why Buy an Existing Dental Practice: Built-in Patient Base = Built in Cash Flow

While this is far from being the only advantage, it is certainly the most significant one. You have a stream of income from day one that you will need to cover the debt you incurred to buy the dental practice, your dental school loans, the practice overhead costs, and your personal expenses. If you start a new practice, you’ll have those same expenses but will have to cover it all with your practice loan until your new practice can cover its own costs. That is to say, most often, an existing practice will get you closer to where you want to be earning—and paying off those loans—much faster.

Don’t Try and Buy a Practice on Your Own

As stated above, dental practice transitions can be quite complicated. Fortunately, however, you are not expected to be an expert at anything other than dental care. You don’t need to be a financial expert, a legal expert, a business valuator, or a practice transition specialist. You can—and most definitely should—hire those people. This investment is the foundation of your career and will be the financial bedrock you build the rest of your life on. Do not cut corners or proceed blindly. The money you spend on trusted, qualified advisors will be well worth it in the end.

You should think carefully about hiring the following types of advisors:

  • Dental Practice Transition Specialist. Some doctors will try and put their dental office for sale on their own. Going through a broker or specialist, however, has many advantages. Typically, in dental practice transitions, the broker represents the seller. This, however, doesn’t mean that you, as the buyer, should be wary of them. Any one with a good reputation understands that their job is to try and get a mutually beneficial outcome for both the buyer and seller. This means a responsible broker has vetted the listing, done an appraisal, and set a fair market price; and the broker is looking for the right buyer—one who’s experience, goals, and personality are a good match for the practice. A successful dental practice transition is one where everyone walks away happy. Plus, someday you will want to sell your dental practice and you will need a broker then. Smart brokers understand this.
  • Dental CPA. Even if you already have an accountant you like, you will be best served by one with extensive dental practice experience. A good rule of thumb is to find one with a minimum of 25 other dental clients. There are a number of financial issues, especially regarding the buying or selling of a dental practice, that are unique to the industry, such as the tax ramifications of how the practice assets are allocated, costs analysis on hiring and equipment purchases, expense averages, and other best practices they’ve learned from serving their dental clients. Finding a dental CPA you can trust and work with now can result in a lifelong professional relationship.
  • Dental attorney. This person can act as your representative in the deal, as the seller is already represented by the practice transition specialist. You are better off with a specialist as there are issues specific to the industry that you’ll need advise on. These include the terms of the buy/sell agreement, office lease negotiations, non-compete covenants, establishing your corporation, and lender requirements. Because this is a niche service, local dental-specific attorneys will have a reputation among doctors in the community and may offer their advice at a package price (avoiding billable attorney hours which get very expensive, very fast).
  • Dental lending specialist. You may have heard that banks like to lend to dentists to buy practices. Generally speaking, it’s a good investment for banks and most banks know this. But dental practice loans aren’t like other small business loans. A lender who doesn’t understand the industry may not know how dental practices are valued, with the intangible “goodwill” of the practice often being 75% or more of the value of the practice. To a typical banker, this could look like a bad deal, as the tangible assets are far, far less than the requested loan amount. This could mean that you get the loan but with less favorable terms (shorter term, less flexibility to grow, etc.)

By working with these specialists, you are buying knowledge and experience to help navigate the complexity of the deal without having to become an expert yourself or stumbling blindly into a thicket of legal and accounting issues. With a good team in your corner, you can rest assure that your interests are being protected.

Risks of Buying a Dental Practice

Nothing in life is risk free, especially nothing really worth doing. Risk is not to be feared but to be intelligently assessed in order to make an informed decision. Here are some things you should think about both before and while considering existing dental offices for sale.

  • The practice is built on someone else’s personality and philosophy. The selling doctor built up their practice the way they wanted their practice to be. This includes everything from equipment to furniture to staff (hiring, training, supervising, or lack thereof) to patient flow and so on. We’ll discuss this more below, but consider carefully whether the practice is one that you can fit in to. You can make changes as you go, but for the practice to maintain the level of success it has at the time you buy it, you need to be able to keep it running smoothly.
  • You will lose patients during the transition. While the fears of patient attrition in dental practice transitions can be overstated, the fact is that some patients will leave. How many and how quickly depends on how you manage the transition with the selling doctor. The seller’s broker, the person with the most experience in this area, can be an invaluable tool in helping guide this part of the transition.
  • Staff may be overpaid, undertrained, disloyal, or all three. It is generally to your advantage to keep staff on at their same level of compensation for at least 90 to 180 days. That said, you can only control what you do. Some staff may choose to leave on their own. However, changing faces in the office or disgruntled employees can have as much, if not more, of an impact on patient retention as the change in doctor. After all, patients begin and end their experience in the office with the front desk staff and often spend more time interacting with hygienists and administrative personnel than the doctor.
  • Equipment and office decor may need to be updated. This can be expensive, so look carefully at how the office is furnished and equipped. Determine if there is an effective office management software system. If you need to make any of these upgrades, you’ll want that provided for in your loan.

Do Your Due Diligence

While the seller’s broker will have done work on their end to evaluate and value the practice, you should still have your own consultant analyze the staff, the systems, and perform a complete chart audit/patient count to make sure you are buying what you think you are. This person can also help you post-sale with concerns regarding staffing (hiring and firing), and customizing the practice to shape it the way you want it to be, without doing too much too soon or in a haphazard manner.  In addition to the practical aspects of the practice, you also want to consider with any dental office for sale the following questions:

  • Does this practice match your professional vision, and will it continue to for years to come?
  • Do you and the seller practice the same quality of care?
  • Is the practice’s type of dentistry align with your vision? Is the practice fee-for-service?
  • What percentage of the practice capitation?
  • What is the percentage of PPO patients?
  • What is the ratio of cosmetic or restorative dentistry versus hygiene? How much business is referred out to specialists?
  • Can you perform the specialty care if it has been kept in house?
  • Knowledge is power, and the more you know about this big investment, the better.

Bring Change Slowly

Despite all of this talk about how you are buying not just the office, but the staff, systems, and philosophy of the selling dentist, that does not mean you are locked into any of those things. Once the practice is yours, it’s yours. You should plan on making it into the kind of dental practice that you want it to be—one that will support your vision for your career.

The key is that the changes you make should be done with deliberation. That means after careful consideration and in due time. Make sure you understand how every part of the office works, and why it was set up that way, before you start making changes. There is a lot of history there and that can include a lot of information you don’t yet know. You have time, so be careful and be patient.

ddsmatch Southwest has Quality Dental Offices for Sale Throughout Texas and New Mexico

If you are looking for a dental office for sale in Texas or New Mexico, check out our current listings. And, as dental practice transition specialists, we have the experience of hundreds of successful dental practice transitions from all across the country to draw on to help match the right buyer with our sellers for a mutually beneficial outcome. If you have questions about our available dental practices or want more information, please contact us today.

Preparing Your Dental Practice for Sale: Efficiency Increases Value

If you’re at the point in your career when the time for putting your dental practice for sale is getting near but you’re not sure if you’re really where you need to be in terms of your collections, you’re not alone. Fortunately, there are some pretty simple things you can do to help boost those numbers. And, you don’t have to figure it alone. Below we’ll share some tips on how to create more efficiency in your practice, which can help lower overhead and increase productivity, both of which impact your profitability and will make your practice  more attractive to buyers.

Many doctors think about the profitability of their practice in isolated categories. What are my overhead costs? What are my collections? What is my production rate? No doubt, these are significant factors. But the key to understanding how to boost profitability is in understanding all of the moving parts that contribute to these factors and how they relate to one another. That understanding leads you being able to make necessary changes that allow you to work smarter, not harder, to reach your goals.

Rethink Your Scheduling to Maximize Efficiency

One approach to scheduling is to break the day into time segments and try to fill them all up. If you’ve got a full schedule each day, that’s great. But how can you increase collections if you’re already at capacity? Remember that not every task you do during the day requires the same effort and skill. By considering how your energy and attentiveness ebbs and flows throughout the workday, you can maximize your productivity by scheduling to those patterns.

For instance, if you feel the most fresh and alert in the mornings, use those times to do your more intensive procedures and prepare crowns. Save the fillings and simpler procedures for later in the day. You’ll get those more intensive tasks done quicker than you would if you’ve scheduled them for when you feel the drag of the workday later on. Saving that time can allow you to fit just a little more in your day than you would have otherwise, which adds up day after day, week after week.

This will require some training and supervision of staff as they learn to steer patients to an appropriate time slot based on the procedure. However, your staff should understand that this is not only good for the practice, it’s good for the patient as well. You’ll be better able to perform those intensive procedures, with fewer hiccups, and get the patient on their way a little faster. This is good for patient retention, your reputation, and your band, all of which will reflect in a more value when you put your dental practice for sale.

Relatedly, consider scheduling new patient appointments immediately after the lunch break. This way, you will never be late for that appointment, creating a good first impression: one of reliability and organization.

How Well Does Your Team Work Together?

You may have a great staff that you’ve carefully selected and trained over the years. You may even have no complaints about any of their performance. But this doesn’t mean that there isn’t room for improvement. Not just change for the sake of change, but honing the skills that already exist.

This is all about saving time. A perfectly efficient office is one where there is no wasted time or forgotten tasks. All of the departments are both running smoothly and well-integrated so that as patients, records, information, and materials flow from one to another there are no points at which the system stalls or breaks down. Since, however, we do not live in a perfect world, it’s unlikely your office runs this well.

Consider each staff member in their individual role. Do they know their job well? Do they understand their role in the organization—how they are supporting you in providing the highest quality care to your patients? Do they forget tasks or overlook details? If so, is there a pattern? Your answers to these questions will show you where additional training or supervision may be needed.

Also consider your employees as a unit. How well do they work together? Are there conflicts? Do they communicate well? How integrated is each department? Again, your answers to these questions will show you where organizational refinement may be needed.

The importance of saving time is in reducing overhead costs. Every instance in which you have to take time to address an error, to track something down, to intercede between employees takes time away from your schedule and from theirs. The smoother your office runs, the more everyone can get done within a day. And, as with scheduling, the savings may be incremental, but they will add up, especially when combined with the other changes.

When it does come time for you put your dental practice for sale, your buyer will be impressed with how well your office functions. The efficiency will boost patient satisfaction (benefiting retention), employee satisfaction (happy employees make a positive impression on patients, and can protect your staff during the practice transition (increasing their value to the practice will encourage the buying doctor to keep them on and take care of them).

Look at Your Patients and How they Pay

Even if you are at full capacity, you might be losing out on collections depending on how you are paid for your work. If you accept reduced fee-insurance, are those patients edging out other patients in your schedule who would pay full-fee? Are your fees up to date? When did you last raise them? What is the market value for your services and are you charging appropriately (that is, how do your fees compare to other dentists in the area)? Even if your fees are, in some instances, capped by PPO insurance plans, you don’t have to charge your non-PPO patients at that same rate (and if the PPO fees are below market value, you can use that if you renegotiate with those insurance providers).

Some of these areas can be tricky. Retaining outside experts such as a dental transition specialist, a dental CPA, or a dental practice valuator. You’ll need this kind of professional expertise when you put your dental practice for sale, so building those relationships now will only get you closer to where you want to be before your practice transition.

Update Your Technology

Regarding technology, there can be a limit to how much value you will get out of it. Whether the updates will really boost value will vary from instance to instance. Here are some general guidelines of what is, typically, always worth doing.

Digital radiography and practice management software are the norms. If you don’t have these, you should. First, they both will boost office efficiency and, especially the digital radiography, can translate into higher patient satisfaction. For more on this, read our post about how tech upgrades can add value. Second, whoever buys your practice is likely a much younger doctor who is going to have trained on these systems and may be turned off by the idea of buying a dental office with outdated systems.

Technological upgrades can be expensive, meaning they’ll take time to translate into profitability. However, just because they may not reach that point in your practice before you sell, that doesn’t mean that you won’t see the value reflected in what you are able to get for your practice. Figuring this out can be tricky, though, and consulting with practice transition specialists and dental practice valuators will help you make the best choice for your practice.

Are You Considering Putting Your Dental Practice for Sale in the Next Five Years?

At ddsmatch Southwest, we work with you to determine your goals for your dental practice transition and help you find ways to work toward meeting those goals. If you are considering putting your Texas or New Mexico dental practice for sale in the next five years, we offer a free, no-obligation Practice Transition Assessment. As part of this assessment we’ll discuss the current local market for dental practices, advise on potential practice investments to increase value, suggest other physical and image improvements, and more. Contact us today for your free consultation.

Don’t Fear Patient Attrition When Buying a Dental Practice

A universal concern that arises in dental practice transitions is patient attrition: how many of the selling doctor’s patients will remain with the buying doctor after the transition. And while it’s smart to think about this, the fears about patient attrition can be out of proportion to the risk. When buying a dental practice, if you work with the selling doctor and take a few simple steps, you can keep nearly all of the existing patient base.

Likewise, when selling a dental practice, a doctor shouldn’t be overly concerned about their personal connection to their patients. While its true that over the course of their career, a doctor has spent a lot of time with the patients—in some cases having treated them and their families for years—a quick review of the circumstances surrounding a dental practice transition show why most patients are not inclined to look for a new treatment provider.

Why Patients Stay with the New Doctor After a Dental Practice Transition

Its well established that most of the value of a dental practice is its goodwill. According to one dental practice transition expert, “Goodwill refers to the intangible assets that either restrict or enhance the future earnings of the practice, and includes patient charts, recall systems, staff longevity, noncompete covenants, and the owner’s reputation within the community.” That is, it’s the patient base and whatever keeps them coming back to the treating doctor. More than anything else, this is the value of a dental practice.

When buying a dental practice, the goodwill is the major factor that can make an existing practice more attractive than starting a new practice from the ground up. In order to start a new practice, a doctor will have to go hundreds of thousands dollars in debt, find space, furnish and equip it, hire staff, and have sufficient capital to pay the staff and themselves, while having no existing patient base. When a new doctor is buying a dental practice, however, they take on a substantial amount of debt to be sure, but they typically get a fully operational office with staff, and a built-in patient base with a quantifiable record of collections. Even if the practice loses 20% of the patient base (an untypically high number), the buying doctor is still retains 80% of the patients, which is a whole lot more than zero, which is what the doctor starting a new practice has.

Consider this from the patient’s point of view. They have been to the office. They know where it is and what the experience is like. They have interacted with the receptionist and other administrative personnel. If they are returning or longtime patients, they have an established trust in the doctor, hygienists, and staff. If the transition is properly explained, the buying doctor gets the benefit of the patients’ trust in the selling doctor. And the patients can continue going to the office that they know and trust, saving them the hassle and uncertainty of finding a new provider. Patients won’t make a change without a compelling reason to do so.

Steps to Minimize Attrition when Buying a Dental Practice

While the risk of patient attrition may be overstated, that is not to say you don’t have to worry about it. It just means that you have to have a sensible plan. Here at ddsmatch Southwest, we are dental practice transition experts and bring the experience of hundreds of successful dental practice transitions from all across the country to bear for our clients. Based on this experience, there are a few, simple steps you can take to ensure you retain as many patients as possible when buying a dental practice.

The goal a seamless practice transition, so  the patient to see no changes in the practice, except for the person doing the dentistry.

1 – Send a Transition Letter and Follow-Up Email

As soon as is appropriate, the selling doctor should send a letter to all of their active patients explaining the practice transition (including the selling doctors reasons for selling, if they are neutral or positive reasons such as retirement or relocation), introducing the new doctor, and, most importantly, giving the new doctor a strong endorsement. This letter is trading on the trust and goodwill that the selling doctor has accumulated and, to whatever extent possible, transferring that to the new doctor. The heart of the message is that the selling doctor has put their trust in the new doctor and so should the patients. It can be helpful to include personal touches in the letter such as a photograph of the new doctor (and perhaps their family) and details about their personal life. It’s also useful to follow up by sending the same information in an email to all active patients, in case the letter is overlooked.

Additionally, staff should be trained on how to discuss the transition with patients. The buying and selling doctor should come up with the language they want used if patients inquire about the transition or new doctor either, over the phone or in person, always with an eye toward instilling confidence in the buying doctor.

In short, if the selling doctor and staff trust the new dentist, the patients will too.

2 – Keep the Office Staff

Losing the selling doctor is enough change for the patients. Also, they have generally spent more time interacting with the front of office staff than the doctor. The receptionist sometimes is the person with the most influence over how patients perceive the new doctor. As addressed above, they need to communicate confidence.Just because patients are putting their trust in a new doctor doesn’t mean that trust can withstand sweeping changes in the office. That may make patients nervous.

There are lots of reasons why it may be smart to keep the staff on. Regardless of your plans for staffing the office, you’d be well served to keep the staff on for at least 90-180 days after buying a dental practice, and to keep them on with the same compensation and benefits package that they’ve had. The staff will have their own concerns about the transition and you need to keep their morale high during this critical period. If patients see more unfamiliar faces in the office, detect a change in previously friendly demeanors, or sense uncertainty from the front office staff or hygienists, you risk spooking them into looking for another doctor.

3 – Maintain or Increase Office Hours and Services

Again, this is about not making too many changes at once. A patient may think that a change in who is performing their dental work is acceptable. That does not mean they will tolerate shorter office hours, which may make scheduling appointments difficult or cause them to wait longer than they are comfortable for treatment, or not being able to get the treatment they are accustomed to. The goal is to make the transition as seamless as possible—to not restrict anything that made them initially choose to get treatment from the office and keeps them coming back.

This doesn’t mean you are locked in the prior doctor’s way of doing things forever. It just means that changes are made gradually, not all at once.

If, however, the changes you want to make include extending hours or expanding services, these changes may be implemented sooner, as they can be seen as positive additions by patients (staff may be a different issue, though, especially with regard to extended hours).

4 – Keep the Same Branding

There are two points here. First, as above, you want the transition to be seamless—you don’t want patients to notice any change other than it’s you on the stool beside them. Second, the public’s perception of the dental office—that is, the goodwill—is bound up with the office’s brand. This is not just about what the existing patients think about the practice, but the community in general. If the selling doctor has done well to establish a good reputation in the community, keeping the same branding will help transfer that reputation to you.

5 – Whether or How Long the Selling Doctor Stays On in the Practice

Having the selling doctor stay on can be useful for in-person introductions to the new doctor and to ensure a smooth transition as the new doctor becomes more familiar with the staff and office practices, policies, and procedures. However, staying on too long can negatively impact the buying doctor being able to establish themselves as the new head of the office. Therefore, when buying a dental practice, if you are considering having the selling doctor stay on, carefully consider how much time is really needed. Some people will say it should be three-to-six months but the truth is that the average time is closer to two-to-four weeks (specialty practices may require more time).

ddsmatch Southwest has Available Dental Practices in Texas and New Mexico

If you are considering buying a dental practice, we have several quality practices available throughout Texas and New Mexico. For more information, contact us today.

Should I Buy the Building when Buying a Dental Practice?

One of the most common questions about buying a dental practice is whether to buy or lease the space. And, as with many things in life, the answer is: it depends. It depends on the real estate market where you are looking to practice, whether the practice space is owned by the selling doctor or not, your plans for growing the practice, whether you foresee moving the practice, whether you want to deal with the additional responsibilities of real estate management, what kinds of risk you are comfortable with, just to name of few considerations.

Most advisors will say you should always buy. Some will say you never should. The fact is, that there is no consistent rule. Some doctors have bought their property and lost their shirts when the property devalued. Some doctors have built lucrative practices in leased space. So, ultimately, the question is really what will be best for you and your practice. Below we discuss some of the factors you should think about.

Return on Investment

When you lease, you are paying for someone else’s investment. When you buy, you are paying for your own. When you lease, your monthly payments will increase over time. If you are buying with a fixed-rate mortgage, your monthly payments will stay the same (unless you refinance or there are other loan terms that impact the payments). If you lease, you will pay rent every month until you someone else buys your dental practice. If you buy, depending on where you are at in your career, you may pay off the building and own it outright.

Conversely, when you lease, your landlord is responsible for maintenance and upkeep. When you buy, these are your expenses. When you lease, you have more flexibility to relocate if you need to expand beyond the available space or there are other reasons to move. When you buy, it’s much harder to relocate and cannot be done as quickly. When you lease, you are insulated from the factors that cause property values to drop. When you own, you take the brunt of any economic downturn.

If you choose to acquire real estate as part of buying a dental practice, you have the option of thinking beyond the needs of your practice. If your practice requires 2,500 square feet but are looking to expand, you can buy a 10,000 square foot building, divide it in half, and rent the other 5,000 square feet to another tenant or two or three. This creates an income stream separate from your practice. But it does mean increased costs in terms of managing the space, dealing with tenants, complaints, and repairs.

Also, when you decide, “it’s time to sell my dental practice,” you can choose to sell or keep the real estate, either getting the equity out of the building or an ongoing income stream as part of your retirement plan.

In the end, however, a lot of this comes down to whether you want the risk and responsibility of real estatement ownership.

Control Over the Property

For an entrepreneurial doctor who is buying a dental practice, buying the building (or constructing a new building) can have some real advantages. First, it gives you much more control over your brand, which is a significant asset. You can make the property look how you want. You get to choose your signage. And you get to choose who you share the property with, if there is space for other tenants. These things can add significant value in unexpected ways.

If you lease space in a medical plaza, you might get your name on small sign along with all of the other tenants. You also might not get a sign at all. If you are in a retail space, you might get a sign over your entrance. Or you might not. And you have no control over who is in the spaces around you. If the property is not managed well, you could end up with questionable business as neighbors, or in a space that has high turnover and frequent vacancies. None of these are good for your brand.

By owning the building you can do something such as install a highly visible LED sign at the street. While this can be a significant outlay, you need to consider what you are buying. If you pay, for instance, $17,000 on a sign, assuming you get ten years out of it, that works out to $1,700 per year for 24-hour a day advertising visible to every person who walks or drives past. Some dentists have reported that these kinds of signs have, on their own, increased their business—simply by being there.

Additionally, if you have space to lease out, you get to choose which kinds of business you rent to. There are opportunities for cross-promotion and strategic partnerships. If, for instance, you have pediatric dental practice, you can look for business that also cater to families and children. If you present the opportunity for cross-promotion (having marketing materials in each other’s locations, splitting costs on advertising, etc.) and the exposure from foot traffic, you can end up with a tenant who feels more like a partner and may be willing to pay over market value for the benefits.

It May Pay to Lease when Buying a Dental Practice

If you are a young doctor at the beginning of your career, you may have ambitions beyond those that the selling doctor had realized. If you see room for growth in your new practice, it might make more sense to start out with a lease, with an eye toward buying or building your own space later on.

It wouldn’t make a lot of sense to buy a dental practice and immediately move its location. The move, along with the change in doctor, could have a negative impact on your patient retention (especially if the landlord ends up leasing to another dentist). Also, the perfect space that you envision might not yet be feasible for the practice. Under these circumstances, you may be better off leasing for the first few years as you establish yourself in the practice—and in the community—and put your effort into planning how to expand and and working toward that goal. Then, when you’re outgrowing your present space, you can begin looking at buying or building a new space.

Another reason to consider leasing is the real estate market in the area you are buying a dental practice. If you are in a dense urban area, property values may be so high that buying real estate is not feasible. Also, if you are in a market where real estate costs are peaking, that’s a bad time to buy, as the market will inevitably correct itself. And while real estate tends to appreciate over time, you don’t want to be the one who bought right before the crash.

Tax and Balance Sheet Implications of Leasing versus Buying

Whether you buy or lease space, either can have a positive impact on your tax liability, but in different ways. Lease payments are generally deductible as an ordinary business expense, however, deduction limits may apply. On a balance sheet, however, lease obligations will appear as liabilities (similar to equipment or other assets that you would finance with a traditional bank loan).

When you buy property, on the other had, Section 179 expensing (referring to the tax code section that allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense rather than requiring the cost of the property to be capitalized and depreciated) and first-year bonus depreciation can provide a significant tax savings for the first year the property is used by your dental practice. In fact, recent tax code changes have enhanced these tax breaks such that you may be better off buying things you would have previously leased (such as equipment).

Whether it will be better for your particular practice to buy or lease your practice space is a decision that needs to be made with the advice of a qualified tax professional.

ddsmatch Southwest Has Dental Practices for Sale in Texas and New Mexico

If you are looking to buy a dental practice in Texas or New Mexico, here at ddsmatch Southwest, we have several great options for you to consider. If you are considering selling a dental practice, we are dental transition specialists and can help you prepare and sell your practice on your terms, getting the most value out of your practice. Contact us today to find out what we can do for you.

How DSOs Have Changed the Market for Selling a Dental Practice

Love them or hate them, dental service organizations (DSOs) take up a lot of the conversation when it comes to selling a dental practice. In fact, there is so much ink being spilled over DSOs, you might be surprised that they are not quite as prevalent as you think. Regardless, they are having a significant impact on dental associate employment and dental practice transitions across the country. If you are considering a dental practice transition, you may need to consider a DSO as an option, but, if you don’t think that’s right for you, there are still plenty of private buyers out there. Here we discuss some of the things that you’ll need to think about if you are considering selling your dental practice to a DSO.

How Common are DSOs?

Not as common as you might think. According to DSO News, only about 16-20% of practices in the U.S. are “consolidated practices.” However, if you compare the dental industry to the larger medical industry, where consolidation of physician practices has been going on for quite a bit longer than DSOs have been consolidating dental practices, you can see where this might be headed. According to the American Medical Association, in 2016 the medical industry in the U.S. hit a new benchmark in which less than half of physicians owned their own practice.  

This increasing trend is also shown in dentist employment statistics. As of 2017, the ADA reported that, overall, only 7.4% of all doctors were affiliated with a DSO. However, when you look at younger dentists, the number more than doubles to 16.3% among doctors aged 21-34. This disproportion between the number of new doctors joining DSOs and the number of doctors overall indicate a trend toward DSOs having an increasing presence in the field.

Anecdotally, however, there is evidence that young doctors associate with a DSO but don’t necessarily stay and work long-term in that employment model. After all, a young doctor is looking to get experience quickly and the compensation package offered by a DSO is likely be greater than what they can earn working for a doctor-owned practice. Those higher salaries are going to be attractive to recent grads who have, on average, $261,150 in student loans.

While this is making it harder for doctor-owned practices to attract young dental associates, this doesn’t mean that the younger doctors are necessarily forgoing ownership of their own practices. After all, there are significant financial incentives for owning your own practice. So while DSOs are certainly changing the landscape, they haven’t totally remade it.

Selling a Dental Practice to a DSO May Not Be as Easy as You Think

As with any dental practice transition, the best deal for your practice is going to depend on what you are looking to get out of the practice—whether you want to hand over the keys and walk away with pockets full of cash, whether you want to be rid of the business side of the practice but keep providing patient care for another 20 years, or are somewhere in between.

Because DSOs are have deeper pockets and easier access to financing than most individual buyers, they can often outbid the individual buyers. However, those big offers may not be all cash and can come with a lot of strings attached. No doubt you’ve received numerous emails and postcards urging you to consider joining your practice to a DSO. Note that they often do not say that you will sell your practice and work form the. They say things such as “affiliating you practice” and “partnering” with the DSO. While this indicates something like a legal partnership, it most certainly is not the case. The DSO will own your practice and you will be an employee (although possibly one with stock or stock options).

Also, rumors of high payouts by DSOs can be overstated. First, DSOs are looking for particular kinds of practices. If yours meets their criteria, they may be willing to pay a premium. If not, they may still make an offer, but it might not be as attractive as you would expect. Under those circumstances, you may be better off with an individual buyer.

Second, if you are selling a dental practice with the intention of getting cash at the close and walking away, a DSO is less likely to agree to those terms. A DSO may make an offer that is a combination of cash and stock and will likely want you to stay on for a minimum amount of time (as an employee) to facilitate the transition. They may make a part of what’s being offered dependant upon you being able to meet their production goals. How hands-on or hands-off they will be during the transition will vary. However, to be certain, you will be an employee helping the DSO to remake your practice into what they want it to be. Also, there have been reports of DSOs not being quite as doctor-friendly or flexible as they present themselves (in addition to reports of some questionable patient care practices).

What to Consider when Selling a Dental Practice to a DSO

As stated above, a DSO is unlikely to offer you a premium for your practice in an all cash deal where you collect your payment and go on your merry way. So, if you are considering selling your dental practice to a DSO, here are some things you may have to grapple with.

The sale price that you will be offered can be comprised of a few different parts:

  • Cash at close: this is pretty straightforward— it’s the actual dollar amount put into your hand when the papers and signed and the sale is closed.
  • Earn out: this is money that you might get at the end of a multi-year employment commitment and is based on financial goals set for the practice. If you meet certain goals, you get a certain amount. If you don’t, then you mostly likely won’t get most, or possibly any, of the earn out amount. This allows the DSO to make a higher offer but end up saving some of that cost if your practice fails to perform with sufficient profitability from the DSOs perspective.
  • Equity roll: this is where you have the option to take some of your cash at close and invest it in the DSO’s parent company. This is not always an option. However, when it is, the idea is that the buyer is a successful company that’s good at getting a return on its investments and you may be able to take the proceeds of the sale of a dental practice and turn it into even more money down the road.

The other major aspect to think about is becoming an employee of the DSO. This is definitely something to look at closely and carefully consider if an earn out is part of the deal. Some DSOs will negotiate some terms of employment, some will not. Regardless, you need to look at:

  • Clinical compensation rate: is it based on collections or production? What about lab costs?
  • Overall benefits package: does it include health insurance, malpractice insurance, a retirement savings plan, does the employer match any contributions for retirement, do they pay for continuing education?
  • Non-compete agreement: how big of a geographical area and for how many years? Be sure to have a qualified attorney review the terms.
  • Ownership: are you being bought by a public or private corporation? If you are being offered stock, what are you getting stock in?

Whether selling a dental practice to a DSO is the right choice for you is ultimately dependant upon the goals you have for your practice’s transition. At ddsmatch Southwest, our dental practice transition specialists work with you to help you define those goals and then use those goals to help identify a buyer with the right skill set and personality match to carry on your practice and the legacy you have worked so hard to build, whether it be a DSO or an individual buyer. If you are considering transitioning your practice in the next five years, contact us today for your free, no-obligation Practice Transition Assessment.

Should You Stay On After You Put Your Dental Office for Sale?

A common occurrence in dental practice transitions is where the seller puts a dental office for sale but, for whatever reason, will stay on with the practice after the sale closes. This can happen for a variety of reasons, however, when it’s driven by the selling doctor, it’s often a case where the doctor wants to “sell my dental practice” but isn’t actually ready to retire. These situations can be problematic. Here at ddsmatch Southwest, we believe a good dental practice transition is one where everyone is happy with the outcome. Here are some tips we have about when selling doctors should stay one and what expectations both the buyer and seller should have.

Why Do You Want to Stay in the Practice After the Sale?

The first thing you need to consider is why you want to stay on. If you want to facilitate a smooth and successful transition, that’s great. Having the selling doctor stay in the practice can help with many potentially problematic aspects of the transition.

  1. Staunching the loss of patients. Experience has shown there will be a certain amount of patient attrition in a transition. Having the doctor patients are familiar with can ameliorate patient loss. Additionally, the selling doctor can work on finishing up treatment plans with certain patients where it makes sense to not try and hand the case off to an unfamiliar doctor. However, depending on the patient experience, this may not always work out. A patient may not appreciate that the familiar doctor is still practicing in the office if they are being seen by the unfamiliar doctor.
  2. Easing the transition for the staff. One of the trickiest parts of putting a dental office for sale is quelling fears of the staff. They are concerned about their job security and how their work environment—which is heavily influenced by the personality and management style of the doctor—will change. By having the buying and selling doctors working together during a fixed transition period can alleviate these concerns. The changes will occur gradually and with the cooperation of the selling doctor who can provide insight as to why things are done the way they are. Changes that are implemented are done over time, perhaps with more consideration given to established practices.
  3. Guidance and training for the new doctor. While every transition is different, it is likely that your practice is being bought by a younger, less-seasoned doctor, one who may only have a few years experience out of dental school that has never managed a practice before. Being able to leverage the knowledge of the selling doctor as the buyer finds their footing can be invaluable.

It is important to note, however, that for these goals to be achieved, both doctors must fully accept that, as of the close of the sale, there is a new owner.  That means there is a new boss, and it’s not the selling doctor, who is now an employee. The selling doctor is there to be a resource and support to the buying doctor, not to try and enforce their own way of doing things. Change is coming to the practice. The selling doctor can help to facilitate it, but should not work against it. That’s a battle the selling doctor will lose while alienating the buying doctor, and possibly the staff and patients as well.

Do Not Expect to Have Your Cake and Eat it Too

To be sure, when you put your dental office for sale, the end of that process is that it’s no longer your dental office. Along with control over staff, policies, practices, and other aspects of the practice, you are also losing your claim on the practice earnings.

Ask any dental transition specialist and they can tell you stories about excessive demands that sellers put on buyers to keep drawing on the earnings of the practice for years after the close of the sale. In one instance, a third-generation doctor with a lucrative practice was demanding an eight-year employment contract with a minimum guaranteed salary and a long-term position for her dentist father. Needless to say, that deal did not go through. In another instance, an orthodontist was requesting to stay on with a minimum of 120 days per year at $1,750 per day (working out to at least $210,000 per year). These doctors are not really ready to sell, much less retire. Such requests are unreasonable and you will be hard pressed to find a willing buyer.

Part of the issue with these kinds of onerous demands are that they will unfairly (if not impossibly) tax the resources of the practice. If you put your dental office for sale but demand to stay on with ongoing compensation equal or greater to that of a full-time associate, you are, in effect, adding the financial burden of an employee where there wasn’t one before (unless you are selling to your associate). It’s unlikely that your practice can support that. If it could, you would have already had to add an associate to keep up with they practice’s workload. If you haven’t reached that point, it will be very difficult for the buyer to pay you.

You might look at your books and think there is plenty of money coming in to support your salary at an associate level. While that may very well be true, you may be overlooking the fact that you probably don’t have a dental practice loan or student debt that you have to service. Your buyer most certainly will and they will need those excess earnings to pay for the education and practice they just bought.

Finally, with regard to compensation if you do stay on for a period, a fair amount would be what you would have offered an associate, whether that be base salary, commission, or a combination of the two. It’s unlikely that your practice will be able to afford to pay you at the level that you’re accustomed to. But that is reasonable because you will no longer be the owner, will full rights to all excess profits.

Are You Really Ready to Put Your Dental Office for Sale?

If this discussion is giving you pause, the question you may need to ask is whether you are really ready to put your dental office for sale. Some doctors may be at a stage of life where they feel like retirement should come next but aren’t psychologically prepared for the change—they have something to retire from but nothing to retire to. If this is the case, as you begin the dental transition process, you should consider what you will do once you no longer have an office to come to each day.

Other doctors may be ready to stop seeing patients and start hitting the links every day but perhaps are concerned about whether the proceeds for the sale will really be able to provide for the level of comfort that they’d like. In that case, you should consider staying in your practice as the owner for an additional period of time as you earn and save a little more. Regardless of the circumstances, selling before you are ready, either psychologically or financially, can cause regret that may be easily avoided.

If you aren’t really ready to retire but aren’t necessarily interested in being a manager or sole proprietor anymore, you have a couple of options that can work to your benefit:

  • Buy-in to buy-out: under this model, you would add a partner to your practice with a plan for the new partner to eventually purchase full ownership of the practice. This is a good option if your practice can support another doctor, or if you have a good candidate in another sole proprietor that can bring their own patients with them. Under this model, you can work towards your transition in a way that is comfortable and meets your dental practice goals.
  • Become an associate: if you are not ready to stop treating patients but would be happy to relinquish the responsibilities for managing the practice, this could be a good option. Recognizing that it would likely involve a pay cut, you would have several options. You could sell your practice to another doctor and be an associate in the practice. You could sell to a DSO and remain as an employee in your practice. Or you could sell outright and find an associate position in another practice (you’d have to consider, however, the impact of the non-compete agreement that you’d have to sign as a part of the sale of your dental practice).

ddsmatch Southwest Can Help You Meet Your Dental Transition Goals

If you are considering a dental practice transition in the next five years but are not sure what option is best for you, ddsmatch Southwest can help. We will discuss with you what you think you need to get for your practice to retire the way that you want, how soon you want to retire, and what kind of buyer you are looking for, be it an outright sale, an associate, a partner, or a DSO. Also, we offer a free, no-obligation Practice Transition Assessment to help you determine what will best help you get to where you want to be before you put your dental office for sale. Contact us today to find out what we can do for you.

What About Your Staff? How to Protect Them When Your Dental Practice is for Sale

Most dentists who are putting their dental practice for sale are concerned about what will happen to their staff after the transition. You’ve put your staff together carefully, worked with them closely for years, and developed personal relationships with them. Its right to worry about their well-being. However, you don’t want to let that worry cause you to make a decision that can jeopardize either the practice transition or their jobs. For these reasons, you need to be careful about how they are informed and provided for before, during, and after the transition.

Why the Buyer Wants to Retain Your Staff

Don’t assume the dental practice buyer will want to fire your staff. A prospective buyer most likely has a strong interest in retaining them. After all, your staff have been working in your office, meaning that they know the files, the systems, policies, and procedures, and, most importantly, the patients. A prospective buyer isn’t going to want to disrupt the flow of a smoothly running practice— an important component in what makes your practice successful, and, therefore, a desirable dental practice for sale. A change in doctor is enough change to foist on your patient base. Most buyers correctly realize that a change in staff may be too much for patients and can have a negative impact on patient retention through the transition.

When Putting a Dental Practice for Sale, Confidentiality is Important

A breach in confidentiality regarding the sale of your dental practice has the potential to sink the deal. This is the last thing you want and you need to protect against it. And although you may not relish the idea of keeping news like this from your staff, it is in their best interest that you do until the time is right.

While a prospective buyer will probably want to retain your staff, you have to consider the situation from the perspective of your staff and your patients. It’s a major change and change can be frightening, especially in an employment context. As the doctor at the end of a long career, you have a perspective that is very different from that of your staff. You once either bought or started a practice and know what it means to have a competent, experienced, and professional staff to support you. Your staff members have probably not had the same experience and may (not unreasonably) be concerned about their job security.

Because of this, you need to be concerned about the news of your dental practice for sale being public. If staff members become skittish, you run the risk of a couple of different negative outcomes. First, you need the news of your dental practice transition to not be public before you choose to make it public. If your staff doesn’t fully comprehend how a little idle chatter can impact the transition, and, by extension, their employment, you run the risk of a staff member mentioning the potential sale to a patient. Once that patient hears about the transition, will they want to stay with a new, unknown doctor? Or will they want to find someone else in the community that is trusted? If that patient knows other patients, will they tell those patients? How will they react? If you start losing patients before the sale is final, how will that impact the financing? Or the willingness of the buyer to go through with the sale?

Second, if a staff member is concerned about job security, they may immediately begin seeking other employment. Having a turnover of staff during your transition is problematic for a couple of reasons. It means you are going to have to be hiring new staff while trying to sell the practice. Those new staff members are going to need training and time to get up to speed on your office practices and procedures, which will impact efficiency. This is not something you need to deal with at that time, nor is it something you want the prospective buyer to see you grappling with. Also, changes in staff can impact patient retention. Your patients interact with your office staff more than with you, and their experience with staff will inform their opinion of the services being offered. So even if the news of the sale of your dental practice is not public, the turnover in staff can have the same negative impact on patient retention.

When Putting a Dental Practice for Sale, Timing is Everything

It’s impossible to overestimate the importance of timing in every aspect of your dental office transition, from when to put your dental office for sale, to when to hand over the keys and walk away for the last time. When to inform your staff is an essential part of this process and needs to be carefully considered. On a personal level, you may feel a loyalty to your staff that compels a desire to let them know as soon as possible. You must, however, do what will be in their best interest, which is to not inform staff until certain aspects of the transition process are locked down.

You need to be the one that is making the transition decisions. As discussed above, you may be the only one in the office that has previous experience with a dental office transition. In addition to risking staff defections or gossip about the sale, you also run the risk of staff talking to the prospective buyer outside of your presence. This would give them influence over the sale and the buyer that they should not have.

In addition to telling staff too early, there is a risk of telling them too late. If you wait until after the sale is final, your staff may feel betrayed, like they have been sold along with the practice to a stranger. You need to have a period of time before the sale is final to be able to inform staff, introduce the new doctor, and allay their fears. This way, your staff has time to address their concerns with you, get to know the new doctor, and prepare for the change.

How do you find the sweet spot? You should consult with your practice transition specialist about how to pick the right way and time to inform the staff. A rule of thumb, however, is that you inform staff after the buyer’s financing is in place and a purchase agreement is signed. This gives you, as the seller, a reasonable degree of confidence that the sale will close, while having time to work through your staff’s issues before closing the sale.

A common practice for doctors who have put their dental practice for sale is to call a staff meeting and inform everyone all at once. Your dental practice transition specialist can help you prepare for this meeting. In fact, it’s not uncommon for the dental practice transition specialist to run this meeting, given their experience with transitions and the common concerns that arise.

Although you may have a desire to speak to each staff member individually, the likelihood is that after you tell the first staff member, the rest will be informed while you are speaking with the second staff member. This robs you of the ability to present it equally to all staff members, to answer questions, and address concerns uniformly. You need to be able to control this message. After the staff meeting, if individual staff members have particular concerns, you can address those one on one.

Don’t Worry!

If you follow the pattern laid out here, you may be pleasantly surprised at how well your staff responds to the news about the dental practice for sale. You can introduce the buyer to your staff as a properly-vetted candidate who is well-suited for your particular practice. You can present to the new doctor with confidence, as a positive change for the practice, the staff, and your patients. This can go along way to calming concerns and making the transition easier for everyone. For more on this topic, read our post about How Staff Should Be Informed about the Sale of a Dental Practice.

ddsmatch Southwest: Dental Transition Specialists who Can Help You With Staff Concerns

At ddsmatch Southwest, we bring the experience of hundreds of successful dental transitions to work for you. We’ll do whatever we can to make your transition a successful one, including advising on, attending, or even running the meeting when you inform your staff about your dental practice for sale, whichever will be the most helpful to you, to your staff, and your buyer. Contact us today to find out how we can help you meet your dental practice transition goals.

Asset Allocation and “How to Sell My Dental Practice?”

If you’ve ever gotten into the weeds of the question of “how to sell my dental practice?” you’ve probably heard talk about allocation. There are different ideas about how to handle allocation and sometimes people disagree. This might make it seem complicated. But it’s not, really. There is a fairly simple rule to follow and, if you work with your dental practice transition specialist and your dental accountant, you should be able to negotiate an allocation that will work for both the seller and the buyer. But first, what is allocation?

Allocation of Assets

Simply put, the allocation of assets is the process of assigning a dollar value to each asset being transferred in the sale of a dental practice (excluding the building, if that is part of the sale). These assets include all of the tangible items of personal property included in the sale and the big intangible that usually accounts for the bulk of the value of a dental practice: the goodwill. We’ll get to why this distinction is important below.

Generally when you put a dental practice for sale, you aren’t selling the business entity (e.g., your LLC or S-Corp), you are selling what the business owns.  That is, you don’t sell your shares of the corporation, you sell off all of the corporation’s assets, including your furniture, equipment, patient records, supplies, your trademark and logos, etc. All of these items are specifically identifiable and can be quantified in value. That is, your equipment is worth what you paid for it, less depreciation over time. How much could you sell your used equipment for? That would be the value its allocated. As far as the intangible of goodwill, the value there is harder to determine and is more fluid.

The Simple Rule for Allocation

The simple rule for allocation of assets is that you determine the value of the practice (for more information on this topic, see our recent post on methods of valuation for dental practices, “How Much is My Dental Practice for Sale Worth?”), negotiate an agreement between the buyer and seller on the value of each category of tangible assets (e.g., the furniture and equipment is worth $150,000, the supplies are worth $10,000, etc.), and whatever remains after that is allocated for goodwill. It’s a fairly simple arithmetic problem, once all parties are on the same page.

For instance, if you are buying a practice for $1,000,000, and the tangible assets are valued at $200,000, the goodwill is then allocated $800,000, or 80% of the purchase price. Some will say that good will should always equal a certain percentage, or fall within a certain range, such as 75-80%. That’s really the tail wagging the dog. There is no rule for how much should be allocated to goodwill. Rather, goodwill tends to fall within that range as dental practices are valuated.

Why Allocation Matters

As you are wondering “how to sell my dental practice?” you might think this sounds like a lot of trouble to go through. Why not just negotiate the overall value of the practice with the buyer and leave it at that? In a word: taxes.

For the seller, tangible assets are taxed at the ordinary rate, whereas the intangibles are taxed at the more favorable capital gains rate. This is why it’s so advantageous to have a high percentage of the purchase price allocated as intangible goodwill. The tangibles have to be allocated at a fair market value. Fair market value is essentially what the buyer and seller agree upon, but has to be within a reasonable range. The rest can then reasonably be called intangible.

If you are a buyer, you want to be able to gain back the maximum amount of the purchase price over as short of a period as you can, by expensing, depreciating, and amortizing the assets. Some of the tangible assets, certain pieces of furniture and equipment, for instance, can be depreciated over five to seven years. The goodwill, however, will take longer to depreciate, 15 years.

How to Sell My Dental Practice and Get the Most Out of It

To maximize the value of the sale of your dental practice, you need to be careful with your allocations to reduce the amount that the IRS will take of your proceeds. This is why it’s so important to have a qualified team of professionals, with knowledge and experience specific to dental practice transitions, to advise you throughout the process. At ddsmatch Southwest, as expert dental transition specialists, we recommend that in addition to a transition specialist, you have dental attorney and a dental accountant who will understand the legal and taxation pitfalls and how to avoid them. We also recommend that you use a Certified Business Valuator to evaluate every aspect of your practice to get it ready to put on the market. At ddsmatch, we partner with Blue & Co., for dental valuation consulting and dental accounting.

If you are considering a Texas dental transition or New Mexico dental transition in the next five years, contact us for a free, no-obligation Practice Transition Assessment. We will discuss the current local dental practice transition marketplace, establish best transition options for your practice, and advise on potential practice investments to increase value. Contact us today and find out how we can help you meet your dental transition goals.

Why Do I have to Sign a Non-Compete When I Sell My Dental Practice?

If you are transitioning your dental practice with the intent to retire from dentistry, you might ask yourself, “if I don’t intend to work as a dentist, why would I sign non-compete agreement when I sell my dental practice?” It may seem unnecessary to you. To the buyer doctor, however, this document is extremely important. In this post, we’ll discuss a little about what these agreements are and why they matter.

Before we get started, however, please understand that the issues surrounding these agreements are legal matters and you need a qualified attorney to counsel you regarding the reasonableness and enforceability of non-competes in your state. This post is for general informational purposes only and should not be relied on for legal advice.

What is a Non-Compete Agreement?

A non-compete agreement is a contract in which one party agrees to not compete with another party in their area of business within a defined geographical area and for a certain length of time. A non-compete agreement may include non-solicitation provisions which prohibits one party from soliciting customers away from another party.

In dentistry, these agreements come up in three basic scenarios:

  1. When Hiring an Dental Associate: the dental associate will likely be asked to sign a non-compete agreement that covers the period after the associate leaves the practice. It would protect the practice by prohibiting the former dental associate from competing directly with the practice or using information from patient files to lure patients away.
  2. When Entering into a Dental Partnership: similar to the dental associate scenario, the agreement covers the period after a partner leaves, to protect the practice.
  3. When Selling a Dental Practice: Again, the agreement is to protect the practice. But, here, the doctor being protected is the buyer—the new doctor. The agreement prohibits the seller from practicing within a certain area for a certain length of time, thereby increasing the chance that the practice’s existing patient base remains with the practice, even after the departure of the long-time owner.

In most states, these agreements are enforceable (California is one notable exception). This means that, especially with regard to dental associates or when you decide “it’s time to sell my dental practice,” a non-compete agreement will likely be a non-negotiable part of the deal. And, in fairness, they are a good idea for whichever doctor is left in the dental practice.

For the buyer of a dental practice, it’s important to be assured that the selling doctor is not going to pocket the money, open a practice across the street, and take all of the patients with them. Also, if the selling doctor is going into retirement, that’s uncharted territory for the seller. What if after a few months or a year or so the seller decides they don’t really like being retired? The buyer wants a guarantee that they will have time to establish themselves in the practice and earn the trust of the patients and staff before having to compete with the seller.

Reasonableness of the Terms

A key to the enforceability of the agreements is whether the terms are reasonable. What does that mean? Well, it depends. It depends on the state law governing the agreement and it depends on the location of the practice. Again, you will need a qualified local attorney to advise you on these issues.

There are two main points on which the agreement must be reasonable: the scope of the geographical area being restricted and how long the restriction will be in place. For the length of time, two to three years is a common duration, although it may be up to five. For the geographical area, it will largely depend on where your practice is located. For instance, in a dense metropolitan area, such as New York City, the area may be small, defined in city blocks. However, in rural Texas, a dental practice for sale might be the only one in a 50-mile radius.

One guide to determining a reasonable geographic area is, before you think “it’s time to sell my dental practice,” consider where your patients live. The area that you draw patients from can be quantified as the area in which about 80% of your patients live. That way you capture the bulk of your patients without chasing the outliers that might make the area too broad and, therefore, unenforceable.

A word on the enforceability of unreasonable restrictions. Some employers or buyers of dental practices might purposefully try and see what they can get away with in terms of overly broad restrictions. This is a bad practice for both parties as it relates to the agreement. Overly broad terms may have the effect of invalidating other parts of the contract which are related—so if you are the one asking for the non-compete, don’t push your luck by asking for too much. If you are the party being restricted, sometimes courts will take the approach that you knew what you were getting into when you signed. Don’t take the risk. Plus, do you really want to be contractually obligated to a party that is trying to get something from you unfairly? In that situation, it’s probably better to walk away.

Other Considerations for the Terms of the Non-Compete Agreement

  • What circumstances will negate the agreement? If the practice ceases operations, is sold to another dentist, or moves location, you should consider how these factors will impact the agreement. For instance, if the practice closes, maybe the agreement should no longer be enforceable. If the practice moves, it should probably depend on where it moves, and how far that is from the original location (e.g., whether it changes the geographical area from which the practice draws the majority of its patients). If the practice is sold, there will likely be a non-compete between the parties to that sale. That would be a situation you’d want to discuss with your attorney.
  • Does it cover going to work for an existing competing dentist? This is mostly applicable to former dental associates or partners, although it could arise in the sale of a dental practice. Even if the change in employment is not advertised and no one is stealing patients, it’s still possible, especially in a small town, that people will learn of the change and that could draw patients away. This is something you should consider and discuss with your attorney and dental practice transition specialist. If you are dealing with a partner or employee leaving the practice, they may be leaving because they are unhappy in the practice, a factor to be carefully considered.
  • Are staff covered by the non-compete agreement? Do you want to prohibit the other party’s ability to hire your staff away from you? Will you state laws allow you to do anything about it proactively?
  • If partners are splitting a practice, how do you divide the resources? Who keeps the patients? Who gets the referral sources? These factors must be decided before you can move forward with any further restrictive agreements.

You Need a Trustworthy Specialist when it’s Time to “Sell My Dental Practice

At ddsmatch Southwest, we are expert dental transition specialists who draw on the experience of hundreds of dental practice transitions from across the country to assist and advise our clients with their dental practice transitions in Texas and New Mexico. One of our satisfied clients said one thing he especially appreciated about the dental transition specialist that handled the sale of his dental practice was that  

“Your issues were his issues . . . the thing that was amazing with me was that I absolutely knew nothing, but absolutely had an amazing experience, and that’s because Andy took good care of me. . . . He’s a good guy. He looks out for his clientele.”

You can read more about that client’s experience on our Dental Transitions Blog.

Whether you think “it’s time to sell my Texas dental practice” or whether you think that time is still a few years down the road, it’s not too early to find out what ddsmatch can do to help you meet your dental transition goals. Contact us today for a free, no-obligation consultation.